Monday, December 19, 2016

Notes on Time Aggregate Imbalance and the Medium of Account

A recent post ("India's Money Shortage") from Scott Sumner, provides useful framing for circumstance reflecting the monetary roles of medium of exchange and medium of account. India continues to suffer from a negative supply shock, via the medium of exchange role. Theirs is a highly unfortunate reality, in which the poor now pay a (temporary?) heavy price of lost access, since larger bills were removed from the marketplace with little to actually replace them. Yet this occurrence is different from today's ongoing medium of account money "shortages", which disproportionately affect lower income levels in ways that are more hidden. From Econlog:

Both old monetarists and market monetarists like to describe recessions in terms of a "shortage of money", caused by either a drop in the money supply or an increase in money demand. In this view, the focus is on money as a medium of exchange.

I've always been uncomfortable with that framing, as I don't think the term "shortage" accurately describes the problem. Rent controls and price controls on gasoline lead to huge queuing problems. In contrast, there are usually no lines at ATMs, even at the worst points of a recession...In my view, it's more useful to think of the problem as an increase in the value of money. My focus is on money as a medium of account.

I don't want to overstate these differences as we both believe the problem is caused by either a decrease in money supply or an increase in money demand, and we both believe that the effects are higher unemployment and monopolistically competitive firms having more difficulty finding customers at their current (sticky) prices.

I find these arguments compelling, and would suggest that the role of money as medium of account is not sufficiently acknowledged. In the twentieth century, the monetary flows of general equilibrium were subjected to the increased valuation of highly specific skills sets. The Baumol effect particularly highlights this equilibrium shifting pattern, since it also generates wide variance in otherwise basic sets of service and asset consumption costs. Indeed, tradable sector activity more quickly adjusts to any lack of monetary representation, in part since the skills sets associated with tradable product tend to be more temporary in nature, than skills sets associated with the knowledge endeavour of non tradable activity.

Monetary problems for the U.S. in particular, reflect broadly expected medium of account valuations in non tradable sector formation. Yet despite the reality of sticky wages and prices, central bankers have gradually become less inclined to represent their full array of aggregate claims to marketplace inclusion. Even though these kinds of very real money shortages don't translate into long lines at ATMs in the U.S., there's a hidden "wait" just the same: much of it, in a wide array of ("innovated") services product not intended for all comers, despite what the evening news might suggest. The high skill services "wait" for low or otherwise fixed incomes, simply occurs on different sets of terms. Some of the "return to gold standard" discussion, can be thought of as medium of account related, in terms of more fixed monetary limits, which would prove less inclined to accommodate high skill services participation in the marketplace.

How to think about the medium of account role for money, in relation to other roles? Consider how money as a unit of account, contributes to overall medium of account marketplace representation, in terms of aggregate resource capacity. For instance: in "An Empire of Wealth" on page 43 (I'm less than 100 pages into this interesting book), John Steele Gordon provides some basic explanations of monetary functions:

As a unit of account, the value of all other commodities is expressed in terms of money. And money acts as a store of value, a place to hold wealth temporarily between productive investments.

Money as medium of account, could be thought of as a natural extension in terms of aggregates, for the unit of account function. But what if the restrictions of a given general equilibrium, make it difficult for "single price" extensions to fully represent production and consumption of goods and services?

Time value could also be expressed as a valid medium of account (with other traditional monetary roles), so as to create more economic complexity and a more complete marketplace. However, money would still provide its normal functions alongside time as a medium of account. Only local asset formation and services formation would exist separately from the broader general equilibrium. Even though knowledge use systems would utilize an alternate equilibrium (for time as medium of account) they would still share the broader economic equilibrium with surrounding economies - especially in terms of tradable sector activity. Eventually, time value as a recognized alternative medium of account, could help to address the high skills marketplace expectations which central bankers have become increasingly disinclined, to fully represent.